RBA granted additional breathing space as inflation ticks up

A February cut to the cash rate is “materially” less probable, with the latest inflation data building on positivity from stronger than expected labour market figures, according to ANZ Research.

The Australian Bureau of Statistics (ABS) has released its latest consumer price index, reporting that headline inflation rose 0.7 per cent in the December quarter and 1.8 per cent in annual terms – ticking above market expectations (0.6 per cent/1.7 per cent).

Trimmed mean inflation also increased, in line with market expectations, up 0.4 per cent over the quarter and 1.6 per cent in annual terms.

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This comes just a week after the ABS published its latest Labour Force data, reporting a decline in the unemployment rate, from 5.2 per cent to 5.1 per cent.

Following the release of the labour market figures, ANZ Research observed that despite initial expectations for a cut to the cash rate in February, the Reserve Bank of Australia (RBA) may postpone its next rate cut.

The research group has now noted that stronger than expected inflation figures would provide the RBA with additional “flexibility’ in determining the timing of its next monetary policy adjustment.

“Taken all together, this cements our view that an RBA move next week is materially less than a 50 per cent probability,” ANZ Research noted.

However, the group continues to expect further easing from the RBA in the medium term to support its objectives of sustainable growth in the economy, full employment and 2-3 per cent annual inflation.

“[We] think the RBA will eventually need to ease, if it is to drive the unemployment rate down further and get inflation back to target,” ANZ Research concluded.

The RBA’s next monetary policy board meeting will be held on Tuesday, 4 February.